1999 Decisions Opinions of the United

States Court of Appeals for the Third Circuit

12-29-1999

In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. vs. In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. vs.

Nucor Corp] Nucor Corp]

Follow this and additional works at: https://digitalcommons.law.villanova.edu/thirdcircuit_1999

Recommended Citation Recommended Citation "In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. vs. Nucor Corp]" (1999). 1999 Decisions. 332. https://digitalcommons.law.villanova.edu/thirdcircuit_1999/332

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University Charles Widger School of Law Digital Repository. It has been accepted for inclusion in 1999 Decisions by an authorized administrator of Villanova University Charles Widger School of Law Digital Repository.

Filed December 29, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 99-5319 & 99-5382

IN RE: SGL CARBON CORPORATION, Debtor

OFFICIAL COMMITTEE OF UNSECURED CREDITORS,

Appellant at No. 99-5319

v.

NUCOR CORPORATION;

NUCOR-YAMATO STEEL COMPANY,

Appellants at No. 99-5382

On Appeal from the United States District Court

for the District of Delaware

D.C. Civil Action No. 98-cv-02779

(Honorable Joseph J. Farnan, Jr.)

Argued July 29, 1999

Before: SCIRICA and McKEE, Circuit Judges,

and BROTMAN, District Judge*

(Filed: December 29, 1999)

_________________________________________________________________

* The Honorable Stanley S. Brotman, United States District Judge for the

District of New Jersey, sitting by designation.

PHILIP BENTLEY, ESQUIRE

(ARGUED)

KENNETH H. ECKSTEIN, ESQUIRE

Kramer, Levin, Naftalis & Frankel

919 Third Avenue

New York, New York 10022

TERESA K.D. CURRIER, ESQUIRE

Duane, Morris & Heckscher

1201 Market Street, Suite 1500

P.O. Box 195

Wilmington, Delaware 19899

Attorneys for Appellant/Cross-

Appellee, Official Committee of

Unsecured Creditors

JAMES J. RODGERS, ESQUIRE

(ARGUED)

Dilworth, Paxson, Kalish

& Kauffman

1735 Market Street

3200 The Mellon Bank Center

Philadelphia, Pennsylvania 19103

MICHAEL D. RIDBERG, ESQUIRE

Ridberg, Press & Sherbill

Three Bethesda Metro Center,

Suite 650

Bethesda, Maryland 20814

Attorneys for Appellants,

Nucor Corporation; Nucor-Yamato

Steel Company

2

GEORGE J. WADE, ESQUIRE

(ARGUED)

Shearman & Sterling

599 Lexington Avenue

New York, New York 10022

LAURA D. JONES, ESQUIRE

Young, Conaway, Stargatt & Taylor

P.O. Box 391

Rodney Square North, 11th Floor

Wilmington, Delaware 19899-0391

Attorneys for Appellee,

SGL Carbon Corporation

OPINION OF THE COURT

SCIRICA, Circuit Judge.

The issue on appeal is whether, on the facts of this case,

a Chapter 11 bankruptcy petition filed by a financially

healthy company in the face of potentially significant civil

antitrust liability complies with the requirements of the

Bankruptcy Code. In this case, the Official Committee of

Unsecured Creditors of SGL Carbon Corporation appeals

the District Court's order denying its motion to dismiss SGL

Carbon's Chapter 11 bankruptcy petition on bad faith

grounds.

This case also presents the threshold issue whether we

will adopt a "good faith" requirement for Chapter 11

petitions. We will. After undertaking the fact intensive

analysis inherent in the good faith determination, we

conclude that SGL Carbon's Chapter 11 petition lacks a

valid reorganizational purpose and, therefore, lacks the

requisite good faith. We will reverse.

I.

SGL Carbon is a Delaware corporation that manufactures

and sells graphite electrodes used in steel production.1 In

_________________________________________________________________

1. SGL Carbon Corp. is a wholly-owned subsidiary of SGL

Aktiengesellschaft (SGL AG), a German corporation. SGL Carbon Corp. is

3

1997, the United States Department of Justice commenced

an investigation of alleged price-fixing by graphite electrode

manufacturers, including the SGL Carbon Group.2 Soon

thereafter, various steel producers filed class action

antitrust lawsuits in the United States District Court for

the Eastern District of Pennsylvania against SGL Carbon

and other graphite electrode manufacturers. The District

Court consolidated the cases into a single class action and

certified a class under Fed. R. Civ. P. 23(b)(3) consisting of

all United States purchasers of graphite electrodes between

1992 and 1997. Many class members opted out of the class

before the November 28, 1998 opt-out deadline and

subsequently filed or threatened to file separate antitrust

lawsuits. Since the class certification, six complaints have

been filed in federal district court and one complaint has

been filed in a Canadian court.

In June 1998, SGL Carbon's German parent SGL AG

recorded a charge in Deutschmarks of approximately $240

million as its "best estimate" of the SGL Carbon Group's3

potential liability in the criminal and civil antitrust litigation.4

_________________________________________________________________

comprised of two "business units"--the North American Carbon/

Graphite unit, which is of primary interest here, and the specialty

carbon unit.

2. In May 1999, SGL AG (SGL Carbon's parent) and its chairman Robert

Koehler each pled guilty to several criminal antitrust charges and agreed

to pay fines of $135 million and $10 million respectively. It is important

to note that the guilty pleas and the payment of the criminal fines by the

parent company occurred after the filing of the Chapter 11 petition and

the District Court's denial of the motion to dismiss.

3. According to the stipulated facts, "[t]he SGL CARBON Group has more

than 28 manufacturing facilities in 10 countries and has sales in more

than 90 countries. The SGL CARBON Group is the largest manufacturer

of carbon and graphite products in the world and the second largest

manufacturer of graphite electrodes. The North American

Carbon/Graphite Business Unit is one of two business units of the

Debtor. The North American Carbon/Graphite Business Unit operates

only in the United States and Canada." Stipulation of Facts, No. 98B-

2779, at *1. It is important to note, therefore, that SGL Carbon Corp. is

only one part of the SGL Carbon Group.

4. Although the record does not reflect the amount by which the $240

million reserve was increased by SGL AG subsequent to its guilty plea

and accompanying fine, the parties have indicated that the reserve was

increased. It is significant that, at the time of SGL Carbon's Chapter 11

petition, the $240 million reserve was in place and untouched.

4

On December 16, 1998, at the direction of SGL AG, SGL

Carbon filed a voluntary Chapter 11 bankruptcy petition in

the United States District Court for Delaware. In SGL

Carbon's Disclosure Statement, in a section addressing

"Factors Leading to [the] Chapter 11 Filing," SGL Carbon

only discussed the antitrust litigation. The bankruptcy

filing contained a proposed reorganization plan under

which only one type of creditor would be required to accept

less than full cash payment for its account, namely the

antitrust plaintiffs who obtained judgments against SGL

Carbon. Under the plan, potential antitrust judgment

creditors would receive credits against future purchases of

SGL Carbon's product valid for 30 months following the

plan's confirmation. The proposed plan also bars any

claimant from bringing an action against SGL Carbon's

affiliates, including its parent SGL AG, "based on, relating

to, arising out of, or in any way connected with" their

claims against SGL Carbon.

The next day, on December 17, in a press release, SGL

Carbon explained it had filed for bankruptcy "to protect

itself against excessive demands made by plaintiffs in civil

antitrust litigation and in order to achieve an expeditious

resolution of the claims against it." The press release also

stated:

SGL CARBON Corporation believes that in its case

Chapter 11 protection provides the most effective and

efficient means for resolving the civil antitrust claims.

. . .

. . . .

"SGL CARBON Corporation is financially healthy,"

said Wayne T. Burgess, SGL CARBON Corporation's

president. "If we did not face [antitrust] claims for such

excessive amounts, we would not have had to file for

Chapter 11. We expect to continue our normal

business operations."

. . . .

However, because certain plaintiffs continue to make

excessive and unreasonable demands, SGL CARBON

Corporation believes the prospects of ever reaching a

5

commercially practicable settlement with them are

remote. After much consideration, SGL CARBON

Corporation determined that the most appropriate

course of action to address the situation without

harming its business was to voluntarily file for chapter

11 protection.

. . . .

Contemporaneous with the press release, SGL AG

Chairman Robert Koehler conducted a telephone conference

call with securities analysts, stating that SGL Carbon was

"financially healthier" than before and denying the antitrust

litigation was "starting to have a material impact on [SGL

Carbon's] ongoing operations in the sense that . . . [it was]

starting to lose market share." He also stated that SGL

Carbon's Chapter 11 petition was "fairly innovative [and]

creative" because "usually Chapter 11 is used as protection

against serious insolvency or credit problems, which is not

the case [with SGL Carbon's petition]."

Two weeks after SGL Carbon filed its petition and issued

the press release, the United States Trustee formed a nine

member Official Committee of Unsecured Creditors. Eight of

the committee members are antitrust plaintiffs; two of the

eight serve as class representatives and the other six have

opted out of the class.5 In January 1999, the Committee

filed a motion to dismiss SGL Carbon's bankruptcy petition

on the grounds that it was a "litigation tactic designed to

frustrate the prosecution of the civil antitrust claims

pending against [SGL Carbon] and preserve[SGL Carbon's]

equity from these claims." In re SGL Carbon Corp., 233 B.R.

285, 287 (D. Del. 1999).

The District Court held a hearing on the motion on

February 17, 1999.6 Neither side presented witnesses. The

evidence was entirely documentary or deposition testimony,

including the deposition of SGL Carbon's Vice President

Theodore Breyer, who directs the company's graphite

electrode business in the United States. In his deposition,

Breyer testified that SGL Carbon was financially healthy,

_________________________________________________________________

5. The ninth Committee member is a trade creditor--Conoco, Inc.

6. SGL Carbon's case was not referred to a bankruptcy court.

6

having no overdue debts when it filed its Chapter 11

petition. Breyer stated that he recommended filing for

bankruptcy because he believed SGL Carbon "could not

expeditiously settle with the [antitrust] plaintiffs" absent

Chapter 11 protection. Acknowledging that bankruptcy

protection was the "sole reason" SGL AG's Executive

Committee had authorized the Chapter 11 petition, Breyer

testified that he believed filing for Chapter 11 would

"change the negotiating platform" with plaintiffs and

"increase the pressure on . . . plaintiffs to settle."

The District Court denied the Committee's motion to

dismiss on April 23, 1999 assuming, without deciding, that

11 U.S.C. S 1112(b) imposes a duty of good faith upon

bankruptcy petitioners. It further assumed this duty

requires the proposed reorganization to further what it

characterized as Chapter 11's purpose: " `to restructure a

business's finances so that it may continue to operate,

provide its employees with jobs, pay its creditors and

produce a return for its stockholders.' " SGL Carbon Corp.,

233 B.R. at 288 (quoting H.R. Rep. No. 595 (1977) reprinted

in 1978 U.S.C.C.A.N. 6179). The court made nofindings

that SGL Carbon filed for bankruptcy for reasons other

than to improve its negotiating position with plaintiffs. But

the court concluded the petition furthered the purpose of

Chapter 11 because plaintiffs' litigation was imperiling SGL

Carbon's operation by distracting its management, was

potentially ruinous and could eventually force the company

out of business. The court explained that

[t]he distractions of the litigation pose a serious threat

to the continued successful operations of [SGL

Carbon]. Further, the potential liability faced by [SGL

Carbon] could very well force it out of business.

Consistent with the policies and purposes of Chapter

11 which encourage early filing so as to increase the

possibility of successful reorganization, the Court will

not allow [SGL Carbon] to wait idly by for impending

financial and operational ruin, when [SGL Carbon] can

take action now to avoid such a consequence.

SGL Carbon Corp., 233 B.R. at 291.

The Committee has appealed.

7

II.

The District Court had jurisdiction over this bankruptcy

case under 28 U.S.C. S 1334(a). We have jurisdiction under

28 U.S.C. S 1291. See In re Brown, 916 F.2d 120, 124 (3d

Cir. 1990) (holding that order denying motion to dismiss a

bankruptcy petition is "final" under 28 U.S.C.S 1291).

We have not yet had occasion to decide what standard of

review to apply to a dismissal of a Chapter 11 petition.

Consistent with the other courts of appeals to consider the

issue, we believe this decision is committed to the sound

discretion of the bankruptcy or district court and will

review for abuse of discretion. See, e.g., Leavitt v. Soto (In

re Leavitt), 171 F.3d 1219 (9th Cir. 1999) (reviewing for

abuse of discretion);7 In re Abijoe Realty Corp., 943 F.2d

121, 128 (1st Cir. 1991) (same). Mindful that "an abuse of

discretion exists where the district court's decision rests

upon a clearly erroneous finding of fact, an errant

conclusion of law, or an improper application of law to

fact," ACLU v. Black Horse Pike Reg'l Bd. of Ed., 84 F.3d

1471, 1476 (3d Cir. 1996) (internal quotations omitted), we

review the findings of fact leading to the decision for clear

error and exercise plenary review over the court's

conclusions of law. See First Jersey Nat'l Bank v. Brown (In

re Brown), 951 F.2d 564, 567 (3d Cir. 1991). See also

Leavitt, 171 F.3d at 1222 (applying differing standards of

review to different components of good faith/bad faith

determination); Abijoe Realty Corp., 943 F.2d at 128 (same).

III.

11 U.S.C. S 1112(b) governs the dismissal or conversion

of Chapter 11 petitions. It provides in part:

[T]he court may convert a case under [Chapter 11] to

a case under Chapter 7 . . . or may dismiss a case

under this chapter, whichever is in the best interest of

creditors and the estate, for cause . . . .

_________________________________________________________________

7. Although In re Leavitt addressed a good faith determination regarding

a Chapter 13 bankruptcy petition, there is no significant distinction

between Chapter 11 and Chapter 13 petitions with respect to the

appropriate standard of review.

8

11 U.S.C. S 1112(b).

The statute provides for dismissal for cause, if it is in the

best interest of the creditors and the estate. Conversion is

not an option here.8 We will determine whether there is

cause for dismissal.

A.

The threshold issue is whether Chapter 11 petitions may

be dismissed for "cause" under 11 U.S.C. S 1112(b) if not

filed in good faith. Although we have not squarely

addressed this issue, we implied in First Jersey Nat'l Bank

v. Brown (In re Brown), 951 F.2d 564 (3d Cir. 1991), that

Chapter 11 imposes a good-faith obligation. In Brown, we

considered evidence of bad faith in reviewing the dismissal

of a Chapter 11 petition, but concluded "the evidence . . .

of bad faith . . . was not strong enough for us to say that

it was established as a matter of law." Id. at 572. Because

Brown focused on the adequacy of the record for making a

good faith/bad faith determination, we did not expressly

address whether "bad faith" constituted cause for

dismissal. In this case, we make clear what we implied in

_________________________________________________________________

8. In other circumstances, deciding a motion to dismiss under 11 U.S.C.

S 1112(b), may involve a two-step process offirst deciding whether there

is cause and then deciding whether to dismiss or convert. See Rollex v.

Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d

240, 242 (4th Cir. 1994). That procedure is understandable when

applied to the statutory bases for finding cause that turn on the

impossibility of Chapter 11 relief. See 11 U.S.C. S 1112(b). The same is

not necessarily true in all bad faith cases. Two forms of bad faith can

make a Chapter 11 petition objectionable. One involves either pre- or

post-petition misconduct by the debtor. In such cases, where the debtor

otherwise properly belongs in bankruptcy, dismissal need not always

follow from a finding of bad faith stemming from such misconduct. See

7 Collier on Bankruptcy 1112-70 (15th ed. 1996) ("[I]n many

circumstances, the court might be better advised to address the bad

conduct of the debtor (or some other party) in a manner other than

through dismissal of the proceedings."). In bad faith cases involving the

filing of a petition that is an abuse of the bankruptcy process, however,

S 1112(b)'s conversion/dismissal choice is inappropriate. The proponent

of an abusive petition does not belong in bankruptcy so it is unnecessary

to ask whether dismissal or conversion is in the interest of the

creditors.

9

Brown--Chapter 11 bankruptcy petitions are subject to

dismissal under 11 U.S.C. S 1112(b) unlessfiled in good

faith.

Four factors guide our adoption of a good faith standard

--the permissive language of S 1112(b), viewed in light of its

legislative history; the decisions of our sister courts of

appeals; the equitable nature of bankruptcy; and the

purposes underpinning Chapter 11.

We begin with 11 U.S.C. S 1112(b), which allows the

court to dismiss or convert a Chapter 11 petition for cause

including--

(1) continuing loss to or diminution of the es tate

and absence of a reasonable likelihood of

rehabilitation;

(2) inability to effectuate a plan;

(3) unreasonable delay by the debtor that is

prejudicial to the creditors;

(4) failure to propose a plan [of reorganiz ation]

within any time fixed by the court;

(5) denial of confirmation of every proposed plan

and denial of a request made for additional time for

filing another plan or a modification of a plan;

(6) revocation of an order of confirmation u nder

section 1144 of this title, and denial of confirmation

of another plan or a modified plan under section

1129 of this title;

(7) inability to effectuate substantial

consummation of a confirmed plan;

(8) material default by the debtor with respec t to a

confirmed plan;

(9) termination of a plan by reason of the

occurrence of a condition specified in the plan; or

(10) nonpayment of any fees or charges require d

under chapter 123 of title 28.

11 U.S.C. S1112(b). As many courts and commentators

have noted, this language neither requires nor prohibits

10

imposition of a "good faith" requirement on Chapter 11

petitions. But we have noted the provision that"cause"

"includ[es]" the ten enumerated factors strongly suggests

those factors are not exhaustive and that a court may

consider whether other facts and circumstances qualify as

"cause." See Brown, 951 F.2d at 572; 7 Collier on

Bankruptcy at 1112-20. That interpretation of S 1112(b) is

strengthened by the statute's legislative history, which

provides in part:

[The] list [contained in S 1112(b)] is not exhaustive. The

court will be able to consider other factors as they

arise, and to use its equitable powers to reach an

appropriate result in individual cases.

H.R.Rep. No. 595, at 405, reprinted in 1978 U.S.S.C.A.N.

5963, 6362. The Bankruptcy Code's rules of construction,

which provide that "include" and "including" are not

limiting terms, also support an expansive reading of

S 1112(b). See 11 U.S.C. S 102(3). Section 1112(b), by its

terms, therefore, does not preclude consideration of

unenumerated factors in determining "cause."

We also note the courts of appeals that have considered

the issue have held that the absence of good faith

constitutes "cause" to dismiss a Chapter 11 petition under

S 1112(b). See, e.g., Trident Assocs. Ltd. Partnership v.

Metropolitan Life Ins. Co. (In re Trident Assocs. Ltd.

Partnership), 52 F.3d 127, 130 (6th Cir. 1995); Marsch v.

Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994);

Humble Place Joint Ventures v. Foray (In re Humble Place

Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991); First Nat'l

Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404

(8th Cir. 1990); Phoenix Piccadilly, Ltd. v. Life Ins. Co. (In re

Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir.

1988). In addition, several other courts of appeals have

concluded that Chapter 11 imposes a general good faith

requirement under which petitions can be dismissed for

bad faith. See, e.g., C-TC 9th Ave. Partnership v. Norton Co.

(In re C-TC 9th Ave. Partnership), 113 F.3d 1304 (2d Cir.

1997); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir.

1989); Connell v. Coastal Cable T.V., Inc. (In re Coastal

Cable T.V., Inc.), 709 F.2d 762, 764 (1st Cir. 1983) (Breyer,

J.). Numerous district and bankruptcy courts have reached

11

the same conclusion under either or both approaches. See

Carlos J. Cuevas, Good Faith and Chapter 11: Standard

that Should Be Employed to Dismiss Bad Faith Chapter 11

Cases, 60 Tenn. L. Rev. 525 (1993).9

The "good faith" requirement for Chapter 11 petitioners

has strong roots in equity. The court in In re Victory

Construction Co., Inc., in first articulating the good faith

requirement under the current Bankruptcy Code,

highlighted the equitable nature of the doctrine when it

explained:

Review and analysis of [the bankruptcy laws and

relevant cases] disclose a common theme and objective

[underlying the reorganization provisions]: avoidance of

the consequences of economic dismemberment and

liquidation, and the preservation of ongoing values in a

manner which does equity and is fair to rights and

interests of the parties affected. But the perimeters of

this potential mark the borderline between fulfillment

and perversion; between accomplishing the objectives

of rehabilitation and reorganization, and the use of

these statutory provisions to destroy and undermine

the legitimate rights and interests of those intended to

benefit by this statutory policy. That borderline is

patrolled by courts of equity, armed with the doctrine

of "good faith" . . . .

9 B.R. 549, 558 (Bankr. C.D. Calif. 1981) order stayed

Hadley v. Victory Construction Co., Inc. (In re Victory

Construction Co., Inc.), 9 B.R. 570 (Bankr. C.D. Calif. 1981).

A debtor who attempts to garner shelter under the

Bankruptcy Code, therefore, must act in conformity with

the Code's underlying principles. See Little Creek Dev. Co.

v. Commonwealth Mortgage Corp. (In re Little Creek Dev.

Co.), 779 F.2d 1068, 1076 (5th Cir. 1986) ("[A] good faith

standard protects the jurisdictional integrity of the

bankruptcy courts by rendering their equitable weapons

_________________________________________________________________

9. We need not dwell on the fine distinctions between the two closely

related approaches. See 7 Collier on Bankruptcy at 1112-62-1112-64.

Despite analytic differences, the conclusion of every court of appeals to

address the issue is clear--Chapter 11 petitions must be filed in good

faith or they are subject to dismissal.

12

. . . available only to those debtors and creditors with `clean

hands.' "); see also 7 Collier on Bankruptcy at 1112-68

("Another basic underpinning of the good faith doctrine is

the equitable concept of `clean hands.' As a general matter,

bankruptcy relief is equitable in nature, and, as a general

rule, equitable remedies are not available to any party who

fails to act in an equitable fashion.").

Finally, we believe a good faith requirement is supported

by the purposes underlying Chapter 11. As the Court of

Appeals for the Fifth Circuit noted,

[A good faith standard] furthers the balancing process

between the interests of debtors and creditors which

characterizes so many provisions of the bankruptcy

laws and is necessary to legitimize the delay and costs

imposed upon parties to a bankruptcy. Requirement of

good faith prevents abuse of the bankruptcy process by

debtors whose overriding motive is to delay creditors

without benefitting them in any way . . . .

In re Little Creek, 779 F.2d at 1072; see also Carolin, 886

F.2d at 698 (stating that court's ability to impose good faith

requirement is "indispensable to proper accomplishment of

the basic purposes of Chapter 11 protection").

After considering the language of S 1112(b), its legislative

history, the decisions of other courts of appeals, the

equitable nature of bankruptcy proceedings, and the

purposes behind Chapter 11, we conclude a Chapter 11

petition is subject to dismissal for "cause" under 11 U.S.C.

S 1112(b) unless it is filed in good faith.

B.

Having determined that S 1112(b) imposes a good-faith

requirement on Chapter 11 petitions, we consider whether

SGL Carbon's Chapter 11 petition was filed in good faith.10

_________________________________________________________________

10. Once at issue, the burden falls upon the bankruptcy petitioner to

establish that the petition has been filed in"good faith." See, e.g., In

re

Fox, 232 B.R. 229, 233 (Bankr. D. Kan. 1999); Stage I Land Co. v. United

States, 71 B.R. 225, 229 (D. Minn. 1986). See also 7 Collier on

Bankruptcy at 1112-53 ("[I]f the issue is whether the petition was filed

in good faith, the burden rests on the petitioner.").

13

The requisite fact intensive inquiry requires determining

where SGL Carbon's petition falls along the spectrum

ranging from the clearly acceptable to the patently abusive.

We first review the District Court's findings of fact and then

examine the totality of facts and circumstances to

determine whether they support a finding of good faith. See

In re Trident, 52 F.3d at 131; In re Marsch, 36 F.3d at 829;

In re Laguna, 30 F.3d at 738.

i.

As discussed in part I, the District Court found SGL

Carbon's Chapter 11 petition was filed in good faith for two

reasons: first, because the distractions caused by the

antitrust litigation "posed a serious threat to[SGL

Carbon's] continued successful operations," and second,

because the litigation might result in a judgment that could

cause the company "financial and operational ruin," SGL

was required to file when it did. SGL Carbon, 233 B.R. at

291. Although mindful of the careful consideration given by

the able District Court, we believe each of thesefindings of

fact was clearly erroneous.11

Although there is some evidence that defending against

the antitrust litigation occupied some officers' time, there is

no evidence this "distraction" posed a "serious threat" to

the company's operational well being. At his deposition,

Theodore Breyer12 testified the antitrust litigation consumed

a significant portion of his time. But Breyer also noted the

Carbon/Graphite Business Unit had met all of itsfinancial

targets during the nine months preceding filing.

Additionally, Breyer testified that only his business unit

was heavily involved in the antitrust litigation, recognizing

that any management distraction effecting the rest of SGL

Carbon resulted from the bankruptcy filing and not the

antitrust litigation. As noted, SGL AG and SGL Carbon

_________________________________________________________________

11. Although we conclude these findings were clearly erroneous, we do

not hold that under the proper circumstances managerial distraction

and other litigation harms may not constitute factors contributing to

good faith.

12. As noted, Breyer is the Vice President in charge of SGL Carbon's

North American Carbon/Graphite Business Unit.

14

officers insisted the company was financially healthy

despite the litigation. In addition, SGL AG's Chairman

denied that the litigation was having a "material negative

impact on [SGL Carbon's] operations." In light of all the

evidence, we believe the District Court's finding to the

contrary is mistaken. See United States v. U.S. Gypsum Co.,

333 U.S. 364, 395 (1948).

We also find clearly erroneous that SGL Carbon's

Chapter 11 petition was filed at the appropriate time to

avoid the possibility of a significant judgment that "could

very well force [SGL Carbon] out of business." There is no

evidence that the possible antitrust judgments might force

SGL Carbon out of business. To the contrary, the record is

replete with evidence of SGL Carbon's economic strength.

At the time of filing, SGL Carbon's assets had a stipulated

book value of $400 million, only $100,000 of which was

encumbered. On the date of the petition, SGL Carbon had

$276 million in fixed and non-disputed liabilities. Of those

liabilities, only $26 million were held by outsiders as the

remaining liabilities were either owed to or guaranteed by

SGL AG. Although SGL Carbon's parent, SGL AG, recorded

a $240 million charge on its books as "its best estimate of

the potential liability and expenses of the SGL Carbon

Group in connection with all civil and criminal antitrust

matters," SGL Carbon is only one part of the SGL Carbon

Group covered by the reserve. Furthermore, at the time

SGL Carbon filed its petition, that is, before SGL AG paid

its $135 million criminal fine, the $240 million reserve was

untouched. In documents accompanying its petition, SGL

Carbon estimated the liquidation value of the antitrust

claims at $54 million. In contrast, no evidence was

presented with respect to the amount sought by the

antitrust plaintiffs beyond SGL Carbon's repeated

characterization of their being "unreasonable."

Whether or not SGL Carbon faces a potentially crippling

antitrust judgment, it is incorrect to conclude it had to file

when it did. As noted, SGL Carbon faces no immediate

financial difficulty. All the evidence shows that management

repeatedly asserted the company was financially healthy at

the time of the filing. Although the District Court believed

the litigation might result in a judgment causing "financial

15

and operational ruin" we believe that on the facts here, that

assessment was premature. A Chapter 11 petition would

impose an automatic stay on all efforts to collect the

judgment and would allow the company the exclusive right

to formulate a reorganization plan under which the amount

of the judgment could be adjusted to allow the company to

reorganize. SGL Carbon has offered no evidence it could not

effectively use those protections as the prospect of such a

judgment became imminent.13 The District Court's finding

that the petition had to be filed at that particular time to

avoid financial ruin and therefore was made in good faith is

clearly contradicted by the evidence.

The District Court was correct in noting that the

Bankruptcy Code encourages early filing. See SGL Carbon,

233 B.R. at 291. It is well established that a debtor need

not be insolvent before filing for bankruptcy protection. See,

e.g., In re The Bible Speaks, 65 B.R. 415, 424 (Bankr. D.

Mass. 1986); In re Talladega Steaks, Inc., 50 B.R. 42, 44

(Bankr. N.D. Ala. 1985). See also Daniel R. Cowans,

Bankruptcy Law and Practice (7th ed. 1998) 232. It also is

clear that the drafters of the Bankruptcy Code understood

the need for early access to bankruptcy relief to allow a

debtor to rehabilitate its business before it is faced with a

hopeless situation.14 Such encouragement, however, does

not open the door to premature filing, nor does it allow for

the filing of a bankruptcy petition that lacks a valid

reorganizational purpose. See, e.g., In re Marsch, 36 F.3d at

838; In re Coastal Cable, 709 F.2d at 764; In re Ravick

Corp., 106 B.R. 834, 843 (Bankr. D.N.J. 1989).

SGL Carbon, therefore, is correct that the Bankruptcy

Code does not require specific evidence of insolvency for a

_________________________________________________________________

13. The Texaco Corporation's use of the bankruptcy protections is

instructive. See In re Texaco, Inc., 84 B.R. 893 (Bank. S.D.N.Y. 1988).

Texaco resorted to bankruptcy only after suffering an $11 billion

judgment. Even saddled with such a large judgment, bankruptcy

provided Texaco a means of reorganizing and continuing as a going

concern.

14. See, e.g., Alan N. Resnick, Bankruptcy As A Vehicle for Resolving

Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L. Rev. ____

(forthcoming 2000) M12.

16

voluntary Chapter 11 filing. But SGL Carbon cites no case

holding that petitions filed by financially healthy companies

cannot be subject to dismissal for cause. At any rate, as we

explain more fully, SGL Carbon's ability to meet its debts is

but one of many factors compelling the conclusion it did

not enter Chapter 11 with a valid reorganizational purpose.

We do not hold that a company cannot file a valid

Chapter 11 petition until after a massive judgment has

been entered against it. Courts have allowed companies to

seek the protections of bankruptcy when faced with

pending litigation that posed a serious threat to the

companies' long term viability. See, e.g., Baker v. Latham

Sparrowbush Assocs. (In re Cohoes Indus. Terminal Inc.),

931 F.2d 222 (2d Cir. 1991); In re The Bible Speaks, 65

B.R. 415 (Bankr. D. Mass. 1986); In re Johns-Manville, 36

B.R. 727 (Bankr. S.D.N.Y. 1984). In those cases, however,

debtors experienced serious financial and/or managerial

difficulties at the time of filing. In Cohoes, the Court of

Appeals for the Second Circuit found a good faithfiling, in

part, because "it [was] clear that Cohoes[the debtor] was

encountering financial stress at the time it filed its petition

. . . ." 931 F.2d at 228. In Bible Speaks, pending litigation

had already had an adverse effect on the debtor'sfinancial

well being as it was experiencing "a cash flow problem

which prevent[ed] it from meeting its current obligations,"

compounded by an inability to obtain financing. 65 B.R. at

426. In Johns-Manville, the debtor was facing significant

financial difficulties. A growing wave of asbestos-related

claims forced the debtor to either book a $1.9 billion

reserve thereby triggering potential default on a $450

million debt which, in turn, could have forced partial

liquidation, or file a Chapter 11 petition. See In re Johns-

Manville, 36 B.R. at 730. Large judgments had already been

entered against Johns-Manville and the prospect loomed of

tens of thousands of asbestos health-related suits over the

course of 20-30 years.15 See id. at 729. See also Sandrea

_________________________________________________________________

15. A large number of pending or potential claims also contributed to two

other mass tort related bankruptcy petitions. The 1985 bankruptcy

petition of the A.H. Robins Company came only after"the Company had

settled 9,238 claims for approximately $530,000,000" and "still faced

17

Friedman, Note, Manville: Good Faith Reorganization or

"Insulated" Bankruptcy, 12 Hofstra L. Rev. 121 (1983).

For these reasons, SGL Carbon's reliance on those cases

is misplaced. The mere possibility of a future need to file,

without more, does not establish that a petition wasfiled in

"good faith." See, e.g., In re Cohoes Indus. Terminal Inc.,

931 F.2d at 228 ("Although a debtor need not be in

extremis in order to file [a Chapter 11] petition, it must, at

least, face such financial difficulty that, if it did not file at

that time, it could anticipate the need to file in the future.").

SGL Carbon, by its own account, and by all objective

indicia, experienced no financial difficulty at the time of

filing nor any significant managerial distraction. Although

SGL Carbon may have to file for bankruptcy in the future,

such an attenuated possibility standing alone is not

sufficient to establish the good faith of its present petition.

ii.

We also consider whether other evidence establishes the

good faith of SGL Carbon's petition, that is, whether the

totality of facts and circumstances support a finding of

good faith. Courts have not been unanimous about what

constitutes "good faith" in the Chapter 11filing context.

See, e.g., In re Trident, 52 F.3d at 131 (setting forth eight

factors for courts to consider); In re Marsch, 36 F.3d at

828-29 (describing different approaches); In re Kerr, 908

F.2d at 404 (defining "bad faith" as "a pattern of

concealment, evasion, and direct violations of the Code or

court order which clearly establishes an improper motive

. . . ."); Carolin, 886 F.2d at 700-02 (examining approaches

of other courts and holding a petition lacks good faith if

_________________________________________________________________

over five thousand pending cases in state and federal court." In re A.H.

Robins, 89 B.R. 555, 557 (Bankr. E.D. Va. 1988). Similarly, at the time

it filed for bankruptcy Dow Corning Corporation faced 440,000 potential

claimants which had resulted in the filing of more than "19,000

individual silicone-gel breast implant lawsuits and at least 45 putative

silicone-gel breast implant class actions." In re Dow Corning Corp., 211

B.R. 545, 553 (Bankr. E.D. Mich. 1997). See also Richard L. Marcus &

Edward F. Sherman, Complex Litigation (3d ed. 1998) 205-07.

18

reorganization is objectively futile and if petitioner displays

subjective bad faith); In re Phoenix Piccadilly , 849 F.2d at

1394 (noting that courts may consider "any factors which

evidence `an intent to abuse the judicial process and the

purposes of the reorganization provisions' or . . . factors

which evidence that the petition was filed `to delay or

frustrate the legitimate efforts of secured creditors to

enforce their rights' " (citations omitted)); In re Little Creek

Dev. Co., 779 F.2d at 1072-73 (5th Cir. 1986) (instructing

bankruptcy courts to consider "the debtor's financial

condition, motives, and the local financial realities"). See

also Cuevas, supra, at 529 (noting different approaches).

Despite those differing approaches, several cases hold

that a Chapter 11 petition is not filed in good faith unless

it serves a valid reorganizational purpose. See, e.g., In re

Marsch, 36 F.3d at 828; In re Coastal Cable, 709 F.2d at

764 (stating that there must be "some relation" between

filing and the "reorganization-related purposes that

[Chapter 11] was designed to serve"); In re Ravick Corp.,

106 B.R. 834, 843 (Bankr. D.N.J. 1989). Similarly, because

filing a Chapter 11 petition merely to obtain tactical

litigation advantages is not within "the legitimate scope of

the bankruptcy laws," In re Marsch, 36 F.3d at 828, courts

have typically dismissed Chapter 11 petitions under these

circumstances as well. See id.; In re Argus Group 1700, Inc.,

206 B.R. 757, 765-66 (E.D. Pa. 1997); Furness v. Lilienfield,

35 B.R. 1006, 1013 (D. Md. 1983) ("The Bankruptcy

provisions are intended to benefit those in genuine financial

distress. They are not intended to be used as a mechanism

to orchestrate pending litigation."); In re HBA East, Inc., 87

B.R. 248, 259-60 (Bankr. E.D.N.Y. 1988) ("As a general rule

where, as here, the timing of the filing of a Chapter 11

petition is such that there can be no doubt that the

primary, if not sole, purpose of the filing was a litigation

tactic, the petition may be dismissed as not beingfiled in

good faith."); In re Martin, 51 B.R. 490, 495 (Bankr. M.D.

Fla. 1985). The In re Marsch Court articulated the

relationship between the good faith determination and the

dismissal of petitions filed merely for tactical advantage:

The term "good faith" is somewhat misleading. Though

it suggests that the debtor's subjective intent is

19

determinative, this is not the case. Instead, the"good

faith" filing requirement encompasses several, distinct

equitable limitations that courts have placed on

Chapter 11 filings. Courts have implied such

limitations to deter filings that seek to achieve

objectives outside the legitimate scope of the

bankruptcy laws. Pursuant to 11 U.S.C. S 1112(b),

courts have dismissed cases filed for a variety of

tactical reasons unrelated to reorganization.

In re Marsch, 36 F.3d at 828 (citations omitted).

It is easy to see why courts have required Chapter 11

petitioners to act within the scope of the bankruptcy laws

to further a valid reorganizational purpose. Chapter 11

vests petitioners with considerable powers--the automatic

stay, the exclusive right to propose a reorganization plan,

the discharge of debts, etc.--that can impose significant

hardship on particular creditors. When financially troubled

petitioners seek a chance to remain in business, the

exercise of those powers is justified. But this is not so when

a petitioner's aims lie outside those of the Bankruptcy

Code. See United Sav. Ass'n v. Timbers of Inwood Forest

Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.),

808 F.2d 363, 373 (5th Cir. 1987) (en banc), aff'd, 484

U.S. 365 (1988) (stating that if Chapter 11 plan does not

have a rehabilitative purpose, the "statutory provisions

designed to accomplish the reorganizational objectives

become destructive of the legitimate rights and interests of

creditors"); In re Little Creek, 779 F.2d at 1072 (explaining

that Chapter 11 powers should be given only to debtors

with "clean hands"); Furness, 35 B.R. at 1009 ("Chapter 11

was designed to give those teetering on the verge of a fatal

financial plummet an opportunity to reorganize on solid

ground and try again, not to give profitable enterprises an

opportunity to evade contractual or other liabilities."); see

also 7 Collier on Bankruptcy at 1112-22 (stating that

dismissal is appropriate when costs of Chapter 11 are not

justified).

Courts, therefore, have consistently dismissed Chapter

11 petitions filed by financially healthy companies with no

need to reorganize under the protection of Chapter 11. See

In re Marsch, 36 F.3d at 828-29; In re Argus Group 1700,

20

206 B.R. at 765-66; Furness, 35 B.R. at 1011-13; In re

Talladega Steaks, Inc., 50 B.R. 42, 44 (Bankr. N.D. Ala.

1985). Those courts have recognized that if a petitioner has

no need to rehabilitate or reorganize, its petition cannot

serve the rehabilititative purpose for which Chapter 11 was

designed. See In re Winshall Settlor's Trust, 758 F.2d 1136,

1137 (6th Cir. 1985) ("The purpose of Chapter 11

reorganization is to assist financially distressed business

enterprises by providing them with breathing space in

which to return to a viable state."); see also S. Rep. No. 95-

989, at 9 reprinted in 1978 U.S.C.C.A.N. 5787, 5795 (noting

that "Chapter 11 deals with the reorganization of a

financially distressed enterprise . . . ").

The absence of a valid reorganizational purpose 16 and the

consequent lack of good faith by SGL Carbon is evident

here. SGL Carbon's financial disclosure documents give no

indication the company needed to reorganize under Chapter

11 protection. Prior to filing, SGL Carbon had assets of

$400 million and liabilities of only $276 million, or a net

worth of $124 million. In addition, there is no evidence that

SGL Carbon had difficulty meeting its debts as they came

due, that it had any overdue debts, or that it had defaulted

on any debts. Nor is there any evidence that SGL had any

difficulty raising or borrowing money, or otherwise had

impaired access to the capital markets.

Statements by SGL Carbon and its officials confirm the

company did not need to reorganize under Chapter 11. As

discussed, in a press release issued when SGL Carbonfiled

its petition, the company's president insisted SGL Carbon

was "financially healthy" and that its "normal business

operations" would continue despite bankruptcy. In

addition, SGL AG's Chairman Robert Koehler stated in a

conference call with securities analysts that SGL Carbon

was experiencing "healthy and growing success" and denied

that the class action antitrust litigation was materially

interfering with SGL Carbon's operations or its customer

_________________________________________________________________

16. By focusing on whether there is a valid reorganization purpose, we

do not hold that a lack of good faith is limited to this situation.

Indeed,

"no list is exhaustive of all the factors which could be relevant when

analyzing a particular debtor's good faith." In re Laguna, 30 F.3d at 738.

21

relationships. Koehler added that unlike most Chapter 11

cases, SGL Carbon's petition did not involve "serious

insolvency or credit problems." SGL Carbon Vice President

Theodore Breyer acknowledged in his deposition that SGL

Carbon had no defaults nor any financial distress when it

filed for Chapter 11.

An examination of the reorganization plan SGL Carbon

filed simultaneously with its Chapter 11 petition also

suggests the petition was not motivated by a desire to

reorganize or rehabilitate SGL Carbon's business. 17 Under

the proposed plan, all creditors--including SGL Carbon's

parent SGL AG--other than civil antitrust judgment

creditors are to be paid in full in cash. Antitrust judgment

creditors, by contrast, would be required to accept limited-

time credits to purchase SGL Carbon's products. 18 The

plan's differing treatment of creditors suggests SGL

Carbon's petition was not filed to reorganize the company

but rather to put pressure on antitrust plaintiffs to accept

the company's settlement terms.19

_________________________________________________________________

17. Although the "good faith" of the reorganization plan is not before

this

court, the features of the proposed plan help illuminate the lack of good

faith in the filing. Using the plan to reason backwards concerning SGL

Carbon's motivations is consistent with the practices of bankruptcy

courts. As one bankruptcy court has noted:

Much of the case law on good faith draws heavily upon the time-

honored method of analyzing and establishing a nexus between

cause and effect. Long a modus habilis not only in bankruptcy but

in criminal and tort law and in virtually any legal inquiry where

intent is an issue, this sort of posteriori inquiry permits courts

to

work backwards from effect to cause--to reason, that is, that if

the

probable effect of a reorganization plan is to treat unfairly of

creditors, then the probable cause of the filing was bad faith.

In re Kahn, 34 B.R. 574, 575 (Bankr. W.D. Ky. 1983).

18. Although the plan is not at issue, we note that an analogous

arrangement was held inappropriate as a means of resolving an action

in a nonbankruptcy context. See In re General Motors Corp. Pick-up Truck

Fuel Tank Products Liability, 55 F.3d 768 (3d Cir. 1995).

19. Although it is true the proposed plan would be subject to a separate

"good faith" determination by the bankruptcy court before it could

implemented, see 11 U.S.C. S 1129(a)(3), that is only appropriate if the

22

Comments made by SGL Carbon and SGL AG officers

support that view of SGL Carbon's motives for filing for

Chapter 11. Those officers expressly and repeatedly

acknowledged Chapter 11 petition was filed solely to gain

tactical litigation advantages. See, e.g., December 17, 1998

Press Release; Koehler Conference Call of December 17,

1998 ("We are [filing] merely . . . because of the excessive

demands [of litigants]."); Breyer Deposition (filing for

Chapter 11 would "change the negotiating platform" and

"increase the pressure on . . . plaintiffs to settle"). In

addition, under the heading "Factors Leading to the

Chapter 11 Filing," SGL Carbon's bankruptcy Disclosure

Statement discusses only the civil antitrust litigation and

the difficulties it was having in reaching a settlement with

the remaining plaintiffs.

On appeal, SGL Carbon plays down the litigation tactics

behind its Chapter 11 petition and instead claims it was

forced into Chapter 11 by serious economic difficulty

stemming from the litigation. The company alleges this

difficulty came in three forms: harmful distraction of its

management, the possibility that the litigation would result

in a judgment that "could very well force [SGL Carbon] out

of business," and harm to its customer relationships with

plaintiffs. Because we have already concluded thefirst two

arguments are not supported by the facts, we will address

only the third.

We are not convinced by SGL Carbon's claim that a

Chapter 11 filing was necessary because we see no

evidence the antitrust litigation was significantly harming

its business relationships with the antitrust plaintiffs. For

example, none of SGL Carbon's officers stated that any

customer terminated its purchases from the company

_________________________________________________________________

bankruptcy petition properly belongs before the bankruptcy court. In a

case, such as this one, where a debtor attempts to abuse the bankruptcy

process, proceedings should end well before formal consideration of the

plan. Cf. In re Metropolitan Realty Corp., 433 F.2d 676, 679 (5th Cir.

1970) ("As soon as the lack of good faith affirmatively appeared, the

district court acted properly in dismissing the petition even though the

plan stage had not been reached.").

23

because of the litigation.20 As noted, SGL AG Chairman

Koehler denied the litigation was having a material impact

on SGL Carbon's customer relationships. We note that SGL

Carbon offered no evidence (testamentary or otherwise)

from any customer on this issue. It is also significant that

SGL Carbon's Disclosure Statement, which accompanied its

petition, does not mention harm to customer relationships.

Nor did SGL Carbon attempt to explain how filing for

Chapter 11 would improve its customer relationships. As

noted, many of those customers are plaintiffs in the

antitrust litigation. Moreover, the evidence before the

District Court indicated SGL Carbon's customers eliminated

their orders only after the Chapter 11 petition wasfiled,

suggesting it was the petition, rather than the litigation,

that caused the harm of which the company now

complains. After sifting through the evidence, the only

support for SGL Carbon's argument are its conclusory

allegations. We do not believe those suffice.

SGL Carbon places great emphasis on In re The Bible

Speaks, 65 B.R. 415 (Bankr. D. Mass. 1986), and In re

Johns-Manville, 36 B.R. 727 (Bankr. S.D.N.Y. 1984), two

bankruptcy court cases relied on by the District Court.21

After considering those cases, we conclude they are not

dispositive.

SGL Carbon cites In re The Bible Speaks to support its

argument that the prospect of a significant litigation

judgment by itself establishes the good faith of a Chapter

11 petition. But the litigation in Bible Speaks posed

substantially different problems than does the antitrust

litigation here. In Bible Speaks, the bankruptcy court found

_________________________________________________________________

20. In fact, SGL Carbon Vice President Breyer testified that he could only

be certain that one customer had even reduced its purchases from SGL

Carbon prior to its Chapter 11 petition. Maintaining that a second

customer may also have reduced its purchases, Breyer could not say

why either customer had reduced its purchases. Significantly, Breyer

testified that no customer had terminated its relationship with SGL

Carbon until after the filing.

21. We note that SGL Carbon has not supported its argument that

pending litigation establishes the good faith of a Chapter 11 filing with

any cases from this circuit, or, indeed, any cases other than the

distinguishable Bible Speaks and Johns-Manville.

24

the litigation had "already produced a significant effect" on

the debtor; because of the uncertainty surrounding the

litigation, the debtor was "unable to obtainfinancing." 65

B.R. at 426. SGL Carbon has not alleged the antitrust

litigation has had a similar effect and such evidence is

absent from the record. In addition, the court in Bible

Speaks found that a significant judgment in the litigation

would "probably terminate [the debtor's] existence." Id.

There is no evidence SGL Carbon could not effectively use

Chapter 11 following a judgment in the antitrust litigation.

Also, the court found the litigation prevented the debtor in

Bible Speaks from making "financing [arrangements] or any

type of long range plans." Id. at 427. SGL Carbon has not

alleged the antitrust litigation has impeded itsfinancing or

planning activities; instead, the petitioner has repeatedly

insisted the litigation has had no material effect on its

operations. Finally, the court in Bible Speaks found that

dismissal was not warranted because Chapter 11 was in

the best interests of the debtor and its creditor. See id. at

429. There is no such finding in this case.

We also believe reliance on In re Johns-Mansville is

misplaced. As an initial matter, the Johns-Manville Court

had a narrow view of what constitutes "good faith." After

expressing doubt that S 1112(b) imposes a good-faith

requirement in all Chapter 11 cases, see 36 B.R. at 737,

the court suggested that a Chapter 11 petition lacks good

faith only if filed by a creditor-less company formed as a

sham solely for the purpose of filing a bankruptcy petition,

by a company that never operated legitimately, or by a

company wishing to forestall tax liability or deed of trust

powers. See id. at 737-38. As noted, most of the courts of

appeals believe other facts and circumstances may evidence

lack of good faith.

Johns-Mansville is also factually distinguishable. In

Johns-Manville, the bankruptcy court found the company

had a "compelling" and "pressing" need to reorganize. Id. at

730. As we have explained, SGL Carbon has no such need.22

_________________________________________________________________

22. For example, the Johns-Manville Court noted that the company

would have had to book a $1.9 billion tort liability reserve had it not

filed

for Chapter 11. See id. at 730. This booking would in turn have

accelerated $450 million in outstanding debt and could have forced

liquidation. SGL Carbon has not shown the failure tofile for Chapter 11

would cause it such harm.

25

Prior to the Chapter 11 filing, the Johns Manville plaintiffs

had recovered nearly $4 million in punitive damages

against the company. See In re Johns-Manville, 36 B.R.

743, 746 (Bankr. S.D. N.Y. 1984). The litigation effected by

SGL's Chapter 11 petition, in contrast, is in its nascent

stages. Johns-Manville faced "approximately 16,000

lawsuits pending as of the filing date" with the prospect of

the "filing of an even more staggering number of suits" over

the course of 20-30 years. Johns-Manville, 36 B.R. at 729.

By contrast, SGL Carbon faces a known and finite number

of suits. In addition, the Johns-Manville Court made clear

that its decision was based on factors other than the

debtor's financial health. Unlike this case, the Johns-

Manville creditors pursued their motion only after sixteen

months of bargaining over an acceptable reorganization

plan resulted in a deadlock. In denying the creditors'

motion to dismiss, the court stated it would "bear in mind

the strategical motivations underlying [creditors'] pursuit of

these motions at this time" and would recognize"the

progress toward a successful, perhaps consensual,

reorganization that has already taken place." Id. at 731.

The Official Committee of Unsecured Creditors here did not

delay in filing the motion to dismiss SGL Carbon's Chapter

11 petition; nor does SGL Carbon allege the creditors'

motion was spurred by an intent to extract concessions in

stalled negotiations. This case, therefore, involves neither

the creditors' "strategical motivations" nor the "progress

towards a successful . . . reorganization" that colored the

Johns-Manville Court's opinion. Id.

Based on the facts and circumstances of this case, we

conclude SGL Carbon's Chapter 11 petition lacks a valid

reorganizational purpose and consequently lacks good faith

making it subject to dismissal "for cause" under 11 U.S.C.

S 1112(b).23

_________________________________________________________________

23. Because we conclude SGL Carbon's petition should be dismissed, we

need not address the creditors' argument that the failure to dismiss

would deprive it of its Seventh Amendment right to try its antitrust

claims before a jury.

26

C.

In reaching our conclusion, we are cognizant that it is

growing increasingly difficult to settle large scale litigation.

See, e.g., Ortiz v. Fibreboard Corp., 119 S.Ct. 2295 (1999);

Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). We

recognize that companies that face massive potential

liability and litigation costs continue to seek ways to rapidly

conclude litigation to enable a continuation of their

business and to maintain access to the capital markets. As

evidenced by SGL Carbon's actions in this case, the

Bankruptcy Code presents an inviting safe harbor for such

companies. But this lure creates the possibility of abuse

which must be guarded against to protect the integrity of

the bankruptcy system and the rights of all involved in

such proceedings. Allowing SGL Carbon's bankruptcy

under these circumstances seems to us a significant

departure from the use of Chapter 11 to validly reorganize

financially troubled businesses.

IV.

For the reasons stated, we will reverse the judgment of

the District Court and remand to the District Court so that

it may dismiss SGL Carbon's Chapter 11 petition.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

27�